Responding to the Challenges of Globalization: An Economic Agenda for Mexico

1. Responding to the Challenges of Globalization:An Economic Agenda for Mexico Mexico Business Summit Veracruz October 24, 2005 Joseph E. Stiglitz Columbia University New York

2. The Big Question • What does globalization mean for Mexico? • How can Mexico respond to the challenges posed by globalization • Including increased competition from China

3. The Setting • Mexico’s recent economic performance has not been stellar • Low growth – since NAFTA (between 1994-2004) Mexico’s real GDP per capita, in PPP terms, grew at an annual rate of only 1.1% • Growing gap between Mexico and the U.S. – in 1992, Mexican GDP per capita was 27.5% of the U.S. per capita GDP; By 2004, the ratio fell to 24.6% - 10.42% increase in the gap • Stagnant real wages – during the 1993-1999, real wage in the manufacturing sector declined by more than 20% and remained stagnant since then; the minimum wage lost 50% of its purchasing power during the 1990s • High inequality – According to the UNDP Human Development Report 2004, Mexico’s HDI ranking was 53 among 177 countries but on income distribution (Gini Coefficient) it ranked 162 (the 16th most income-unequal country in the world) • Loss of jobs in the Maquiladora

4. Real Growth in Mexico Source: Compiled from the Penn World Table 6.1 (1950-1974)World Bank Data (1975-2004; GDP per capita, PPP (constant 2000 international $)

5. Interpreting Failures • Failures despite NAFTA, which seemingly opened up large new trading opportunities • In a decade which saw sustained growth and poverty reduction in other developing countries • Especially China

6. Two Responses • “More of the Same” • Decrease wages • Increase taxes on consumption items that are exempt • Privatize oil and electricity • A People Oriented Growth Strategy for Mexico • Increase competition • Strengthen the public sector • “Putting people first” agenda • Enhancing the private sector

7. How Do We Judge Success? • GDP is not a good measure • An economy in which GDP is increasing, but in which most people are becoming poorer (a rich country with increasing number of poor people) is not a successful economy • Trickle down economics does not work • There is more to life than GDP • Living standards, including health, education, public safety and environment • Costa Rica, Uruguay, Cuba has lower GDP-PPP per capita income than Mexico’s but are ranked higher on human development performance (UNDP’s HDI ranking) • GDP does not reflect sustainability • Argentina • Living off depletable natural resources

8. Looking at History • The southern United States was poorest, least educated, least dynamic part of country • Based on low wages • U.S. passed minimum wage law • Leading to major transformation of South • No longer competes with China, Mexico in textiles • But has dynamic growth centers in Atlanta, Houston, Austin, Dallas etc

9. Successes in Asia • Are based on heavy investments in education, infrastructure, technology • High savings rates • With very little of the “more of the same” strategy • In China, central role of TVEs, competition • China’s success in textiles not based just on low wages • Chinese apparel exporters have been able to reduce unit cost by more than 40% between 2000 and 2004 • Although labor cost is higher in China than in Bangladesh, Kenya, Cambodia or Madagascar, China is still the least cost producer of clothing - cost saving mostly came from automation of processes, especially from effective sourcing and supply chain management • Large public investments • Malaysia—government run oil company yields high returns to country

10. China’s Competitive Advantage: An Example Source: Compiled from U.S. Customs (ITC) Data

11. And Even Europe • Norwegian state oil company is among the most efficient • French government electricity enterprise among the most efficient in the world • Privatization may well raise costs and reduce reliability • Privatization in U.S. has brought problems in California of high prices; in Northeast, of reliability

12. Elements of Consensus • Fiscal discipline • But this means looking not just at liability side of balance sheet, but at assets • Net worth lower if oil is depleted, not replaced by increased investment • But investments in people are as important as investments in machines • The market is at the center of success • But markets alone are not enough • Need balance between public and private sector • Getting “right” regulations • Strong anti-trust laws • Regulating natural monopolies • Need to respond to globalization, not retreat from it • Have to think strategically • About dynamic comparative advantage • More transparency, less corruption

13. A People Oriented Growth Strategy for Mexico: I. Enhancing Competition in the Private Sector • Competition essential for low prices, efficiency, innovation • Single most important ingredient for successful market economy • Requires strong anti-trust laws, effectively enforced • Need to make private sector more competitive • Competition policy will lower prices of inputs • Regulation of natural monopolies required to bring prices into line • Important lesson: put into place effective regulatory system before privatization • Enhance supply of energy at competitive prices • Focus should be on results • May require opening up market • But care must be exercised in how this is done • To avoid higher prices

14. A People Oriented Growth Strategy for Mexico: II. Strengthening the Public Sector • Government needs more revenue • Tax revenue as share of GDP low— much lower than other comparable countries (with oil revenue, roughly 15% of GDP) • Insufficient to finance needed investments in infrastructure, education, technology, public safety, health • Needs greater compliance • With full compliance, at existing rates, revenues would be much greater • Problems not just “informal” sector

15. Reforming Taxes • Taxing oligopoly profits could generate substantial revenues with little distortion • Far more equitable than proportional tax on consumption • In New York, important exemptions to sales tax to make it more equitable • Should not make fetish about “comprehensiveness”, especially when so much escapes taxation in any case • Value added tax is not an efficient tax in developing countries • Value added tax is not a tax structure that promotes development • And especially in developing countries where there is inadequate enforcement of income taxes, a value added tax contributes to a regressive overall tax structure

16. A People Oriented Growth Strategy for Mexico: II. Strengthening the Public Sector • Increased government transparency • Important advances in recent years at the federal level and some legislation in 28 states • Mexico has taken a role in global leadership • But principles of “right to know” “freedom of information” need to be more effectively implemented at the state and local levels and extended to those states that don’t have it yet • Benchmark efficiency of the public sector • e.g. in oil and electricity

17. A People Oriented Growth Strategy for Mexico: III. Putting People First • Investments in education • Investments in health • Necessary for success in the global economy - Mexico does not rate high in HDI, 53 in the world, with great disparities across its regions

18. A People Oriented Growth Strategy for Mexico: IV. Implementing Other Pro-Growth Policies • Expanding credit • Lack of availability of credit one of major problems • Successive “reforms” in Mexico’s banking system one of great failures • High level of government indebtedness (over 40% GDP including IPAB and PIDIREGAS) • With few people greatly enriched at public expense • And still banking system is not doing what it is supposed to • Can’t do anything about first problem, but can do something about third • Maintaining pro-growth macro-policy • Focusing on the real-economy, not just inflation • Recognizing impacts of exchange rates and interest rates on growth

19. A People Oriented Growth Strategy for Mexico: IV. Implementing Other Pro-Growth Policies • Need for industrial policies at national and state level • Identifying dynamic comparative advantage • e.g. location near U.S. • Not question of picking winners, but looking for externalities, coordinating needed infrastructure investments • Almost every successful country has had industrial policy • Though today, America’s is largely embedded in defense department

20. Responding to the Challenge of Globalization • Mexico has a choice between two strategies • One has not been working in Mexico, or elsewhere • Failed in promoting growth • Failed even more in promoting well-being of ordinary citizens • One has worked well in many countries • Will need to be adapted to Mexico’s condition • One size fits all policies do not work • Ten/fifteen years ago there was considerable uncertainty about the relative merits of alternative strategies • Recognizing that all strategies are fraught with risk • But evidence over last fifteen years—enormous successes and enormous failures—have brought increased clarity • Though in many circles ideology/interests still prevail

21. Responding to the Challenge of Globalization • Hopefully, Mexico will choose the strategy which is not only likely to enhance economic growth, - helping Mexico respond to the challenge of globalization, - but also will have the greater chance of ensuring that the benefits of that growth are shared widely among the Mexican people